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Crowdfunding May Revolutionize Health Startup Funding

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Crowdfunding has been a breakthrough success with an array of creative and technology projects dreamed up that have gotten funding. A new organization, MedStartr, is bringing this concept to health care, where it can be particularly challenging to get a startup off the ground. They have a twist on crowdfunding to deal with the unique challenges of health care.

"The cheapest form of capital is customer revenue." -- David C. Jones, Altus Alliance

MedStartr is like most crowdfunding sites that are non-equity (crowdfunding isn't legal yet for equity). It has plans later to have an equity model once SEC rules are clarified. In the meantime, MedStartr is striving to hit the sweet spot that the king of the crowdfunding hill, Pebble Technology, hit. That is, customers get a great deal and early access to a product. Meanwhile, the startup gets non-dilutive funding and market validation to help it grow to the next stage.

"Advertising is the tax you pay for being unremarkable." -- Robert Stephens, founder of Geek Squad

Stephens had to bootstrap his business and didn't have any money to advertise. His business was driven, instead, by word-of-mouth. A successful MedStartr project will have forward-looking customers be the initial users who can then lead to the first wave of word-of-mouth referrals.

Inbound Marketing Meet Capital Raising

Crowdfunding also borrows principles from Inbound Marketing that have proven to be a game-changer. As Brian Halligan (CEO of Hubspot) and his co-founder, Dharmesh Shah, who coined the "inbound marketing" term, put it: When you're using Inbound Marketing, the thickness of your brain matters a lot more than the thickness of your wallet. For startups with finite time and money, inbound marketing has two key benefits that are critical to an early stage company that realizes that the cheapest form of capital is a product order:

  1. It Costs Less: Outbound marketing means spending money -- either by buying ads, buying email lists or renting booths at trade shows. Inbound marketing means creating content and talking about it. MedStartr gives startups a platform to share their story in video and text format.
  2. Better Targeting: Techniques like cold-calling and blast email campaigns are notoriously poorly targeted. You're reaching out to individuals because of one or two attributes in a database. When you do Inbound Marketing, you only approach people who qualify themselves. With crowdfunding, that is honed even more as only those who want to work with the company sign up. Targeting benefits all parties -- it saves customers, partners and startups.

To address the challenges in healthcare, MedStartr has focused on the following items to contrast it with Kickstarter, which generally doesn't accept health-related projects:

  • It's the only crowdfunding platform designed specifically for health care where doctors, patients, hospitals, pharma and payers are all important backers of innovation. Previously, hospitals, doctors and patients never had an effective way to do this.
  • Enables a highly motivated population to support and directly affect the change that may help make them or their loved ones healthier. For example, there is a diabetes project and STD-focused project amongst the launch companies. [Disclosure: My company, Avado, is part of the launch of MedStartr.]
  • Fraud prevention is central to the company's value proposition. It does this in two ways.
  1. Bringing the crowd to crowdfunding with an event model that enables people to get to know the entrepreneurs in real life. MedStartr's founder is the organizer for the world's largest healthcare innovation meetup group in the world, Health 2.0 NYC
  2. MedStartr created a credentialing service to ensure that patients and doctors are not mislead

Partnerships Lower Risk for Big Industry Players

Large companies receive many new ideas that sound great, but need to be tested and developed further. They may be attractive but often products need to get to the next level to be a viable investment. In the past, there was not much they could do. Now, they can cut a deal such as "get 500 patients and 25 doctors lined up, get their feedback, raise $x,000, and we will give you another $y,000 for the pilot study." That is exactly what crowdfunding intends to do. When it is successful, it engages the community and provides entrepreneurs with three benefits:

  1. Customers who are looking for the new technology
  2. Media attention and social media buzz
  3. Funding from the people and doctors who will be their customers.

With the partner program industry partners can support the new companies they believe in, build a customer base, market test, and get great PR all less than 60 days. In an industry that acted more like railroad companies than nimble tech startups, this is a much-needed shift. MedStartr has already had a medical society, major pharma company, and one of the Obamacare Accountable Care Organizations decide to be a launch partner with MedStartr. Projects they are supporting will be announced in the coming weeks.

With the need to reinvent health care and the challenge to getting a startup off the ground in the health care industry, MedStartr strives to fill a critical market gap. No one expects it will replace venture capital, but it can get more companies to that stage of their company's development. It will be interesting to see how the crowdfunding model takes off in health care. If it is any indication, even before launch, project backers found their way into the private beta, resulting in several MedStartrs (that is what the project makers call themselves) alarmingly emailing and tweeting, "We've been backed!" and the new catchphrase for those that seek to change the industry with disruptive innovation: "You Back it / We Hack it."